Kulongoski withdrew the state's welcome Thursday to Virginia-based Bay Bridge Enterprises, which wants to tow mothballed ships from California to Oregon and then cut them apart.

He left the door open to a shipbreaking operation on land, however.

"He's not interested in having this company come if it is (working) in the water," said Anna Richter Taylor, a spokeswoman for the governor. "The federal government is the one who benefits from this. If Bay Bridge wants to work with the federal government to locate a dry-dock in Oregon, then let's talk."

Kulongoski said the work would need to be done in a contained dry-dock to address environmental concerns. Portland has the state's only dry-docks, but working in dry-docks is vastly more expensive and rarely done in the shipbreaking industry.

The state's economic development agency started recruiting the company last year.

Kulongoski's decision drew flak from his two competitors in the Democratic primary and some confusion from the shipbreaking company.

"Bay Bridge isn't aware of any changes in the governor's position on ship recycling in Oregon," said spokesman Paul Vogel. "We would welcome the opportunity to meet with him to discuss this essential industry and the most responsible and sustainable way to invest and do this work in Oregon."

Bay Bridge had planned to bring ships from the National Defense Reserve Fleet in California to Oregon. Once the ships were here, the company would pull them into a water-filled slip alongside a scrapping yard, then cut them into pieces at water's edge and on the shore.

Congress has told the U.S. Maritime Administration to scrap what is known as the "ghost fleet." The agency pays private shipbreakers to take the ships off its hands.

The congressional deadline is Sept. 30, but the Maritime Administration has been unable to get the job done, in part because there is no scrapping yard on the West Coast.

More than 60 aging ships now sit in Suisun Bay in the San Francisco estuary. The ships are mostly old merchant ships, with a smattering of naval ships.

The Oregon Economic and Community Development Department began recruiting Bay Bridge last August, trying to place the company at a number of sites on the coast.

When Yaquina Bay in Newport became the site of choice, opposition swelled from local residents. The state - both job recruiters and the governor's office - was caught off-guard by environmental issues and the public uproar.

The Port of Newport in January turned down the shipbreakers, prompting the company to explore new sites in Portland and in Washington state.

Mike Salsgiver, acting director of the economic development department, said his agency was looking for high-paying industrial jobs for Oregon. "Suffice to say we are going through a post-mortem process right now to evaluate how we did what we did," he said.

With Oregon's economy recovering, he said, it may be time to "apply different kinds of filters to things."

Kulongoski is up for re-election this year and facing two opponents in the May primary. Both men, Lane County Commissioner Pete Sorenson and former state Treasurer Jim Hill, said the recruitment was ill-advised from the beginning and badly handled by the governor and his staff.

Richter Taylor, Kulongoski's spokeswoman, responded: "Bringing jobs to Oregon is his priority, but not if it jeopardized Oregon's quality of life."

(Copyright 2006 by The Associated Press. All Rights Reserved.)